The Great Debt Shift

If one were asked to describe the major global economic changes that have
unfolded since the financial crisis began, a good starting place would be the
massive shift of debt from the private to the public sector. Attempting to
arrest a deepening crisis, governments all around the world have bailed out
businesses and companies by transferring bad debts to the public books. Although
these moves have provided some current stability (after all, governments are
much less likely to default), the long-term consequences may be dire.

Two of the world's largest economies, the EU ($16 trillion) and the US ($14
trillion), have become the leading practitioners of private-to-public debt
shifting. The US has assumed the debts of banks, insurers, mortgage holders,
and even entire industrial sectors. The European Union has done the same for
entire states. The resulting public debt levels are, predictably, placing strains
on both the dollar and the euro.

Worse still, the bailouts have created a spirit of apathy toward debt accumulation.
Western governments have embarked on a debt binge for the ages. Already, the
credit ratings of the United States and some of the EU's core countries, such
as France and the UK, are being questioned.

While this socialization of private debt has created deep citizen resentment,
it remains to be seen whether political pressure is enough to hold back the
tide. In the US, the forces of fiscal restraint appear to have the upper hand
at present; but, this late in the game, it is far from certain that the newly
elected fiscal hawks will be able to avert civil unrest and debt default.

It is worth noting that the debt shift has offered some near-term benefits.
Relieved of repayment anxiety, many companies have posted very promising earnings
reports in recent months (one needs to only glance at Detroit). Despite continued
demand weakness, these companies have worked hard to improve their balance
sheets and raise operating margins. The resulting rally in share prices has
given rise to a belief that recovery is at hand.

However, despite buoyant share prices, unemployment continues at dangerously
high levels, depressing tax revenues and leading to much greater entitlement
spending. This has made public debt levels rise even faster.

Total world direct sovereign debt, excluding guarantees and unfunded medical
and pension obligations, is some $41.6 trillion dollars. When the $2.9 trillion
owed by global municipalities is included, total direct public sector debt
is over $50 trillion. Against this total, even the wealth of cash-rich nations
such as China ($2.85 trillion in foreign-exchange reserves) and Japan ($1.1
trillion in reserves) pale into insignificance.

With so little credit to soak up the future financing needs of the US and
the EU, it is no wonder that both their currencies are coming under pressure.
It should be no surprise that Chinese President Hu began his state visit to
the US by warning that the debased dollar was causing much of the world's monetary
problems - and was thus no longer credible as the world's reserve. Once unshielded
by that great privilege, I forecast that the US dollar will plummet.

In many ways, the euro may fare little better. The EU has organized a $1 trillion
rescue package for its smaller members, but, in practice, there is not enough
money for all the troubled peripherals, let alone a core state like France
or Spain. Last week, the EU suggested that Greece should be allowed to default
and restructure much of its debt. The Irish Times reported that the
EU has allowed Ireland to print its own euros to settle the debts of
its banks. Will it allow Portugal, Spain, Belgium, Italy and France to do the
same? If so, what credibility will remain for the euro?

Possible because a major currency collapse is unprecedented in living memory,
investors have been slow to react. While the markets are calm at present, we
mustn't forget that the nature of panic is that it is sudden. It can erupt
quickly and overwhelm the unprepared. When it does, even supposedly rock-solid
assets like Treasury bonds may be discounted severely.

In such a climate, gold and silver are as faithful as Old Yeller.

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John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.